VIX – Volatility Index

An idea on how you can make extra profit by observing options.

By extra profit, I mean a higher than expected profit, i.e., increasing profit without increasing risk.

In the long run, the securities market is efficient. Everyone agrees on this. Market prices tend to move towards the intrinsic value of stocks. However, the market is characterized by panicky deviations.

During panic, market prices of stocks deviate from their intrinsic value by a large amplitude. Panic can be on the scale of the overall market, sectoral, industrial, or specific to a corporation. This panic provides the opportunity to make extra profit.

The market prices of options often reflect the level of panic. There is a term “Implied Volatility,” which describes the expected range of stock price fluctuations based on option prices. The higher the option price, the higher the expected volatility, and if the option prices are significantly out of average range, it indicates panic.

The VIX index describes the implied volatility of stock prices derived from the options on the S&P 500.

Below in the photo, the S&P 500 index (white) and its implied volatility derived from options (red) are shown.

Monitoring the VIX will give you an understanding of the market (investors’) expectations in numerical terms.

P.S.
Such graphs can even be seen for specific organizations.

https://www.spglobal.com/spdji/en/vix-intro/